For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

On June 23, voters in the United Kingdom will decide whether to remain part of the European Union or withdraw from it. The possibility of a British E.U. exit—often shortened to “Brexit”—has caused lots of noise in the press. But what would it mean for investors?

For investors in the United Kingdom, the potential implications are significant. For those in the United States and other parts of the world, the effects would likely be comparatively minor, but they bear consideration nonetheless. Let’s take a look at three key factors.

Economic growth

Economists have offered a range of estimates on Brexit’s economic ramifications; some are positive but the majority are negative.

In terms of gross domestic product, the United Kingdom boasts the world’s fifth-largest economy, according to the World Bank. As of 2015, it ranked seventh among U.S. trading partners, with $114 billion in total trade, according to the U.S. Census Bureau.

Post-Brexit, the United Kingdom would lose the favorable trade tariffs that European Union membership bestows. And inward flows of investment by firms—for example those wanting to establish a United Kingdom presence to access the lucrative British market—might be discouraged. There might also be a negative impact from restrictions on the number of E.U. citizens coming to work in the United Kingdom, something that has boosted the U.K. economy and tax revenues in recent years.

The argument that Brexit would increase U.K. GDP assumes that its trade outside the European Union (particularly with Commonwealth countries such as Canada) could increase, even though such trading opportunities already exist. The anti–European Union camp also argues that removing what they see as burdensome E.U. regulations would allow stronger economic growth. But the United Kingdom is already one of the least-regulated economies in the E.U. What’s more, many E.U. regulations were actually initiated or supported by the U.K. government. In some cases, the U.K. government has introduced rules over and above those that apply elsewhere in the E.U.

Finally, on immigration, it would still be possible for E.U. citizens to live and work in the U.K. post-Brexit, but the choice of who can do so would be up to the U.K. government. On the whole, this could be an improvement over unrestricted access to workers of all types.

Overall, the consensus view of economists suggests that E.U. membership is positive for the U.K. economy, but there are considerable uncertainties, especially over the long run. And while an economic downturn in the U.K. would not carry the global weight of a downturn in, say, the United States or China, there could be ripple effects for countries around the world.

Costs of doing business

For U.K. residents, Brexit would probably mean higher investment costs. U.K.-based asset managers would likely lose access to the “passporting” arrangements that currently allow them to distribute investment products into E.U. markets. This might compel them to set up additional offices in continental Europe, and it’s likely that the cost of doing so would be passed on to the end investor.

The alternative argument is that the costs of investing within the U.K. could fall due to the removal of regulatory costs imposed by the E.U. So overall, the net effect is still probably an increase in cost, but admittedly the outlook is not completely clear.

Market volatility and investor uncertainty

Speculation about the U.K. leaving the E.U. has already caused increased volatility in European and global markets, especially for assets denominated in British pounds. Some studies have suggested that Brexit could cause the pound to weaken further, perhaps by up to 20%. This might suggest that investors should avoid allocating assets to the U.K. However, this possibility has already been “priced in” by the markets to some extent. And if Brexit doesn’t happen, sterling-denominated assets might end up representing good value.

The short-term impact, then, would be a degree of market volatility and disruption. But it’s difficult to predict how significant the impact would be for a long-term investor holding a well-diversified global portfolio.

Peter Westaway

Peter Westaway is Vanguard's Chief European Economist and part of Vanguard Investment Strategy Group. He meets with clients and writes articles to provide Vanguard’s perspective on economic issues and longer-term investment strategy implications. Peter was previously chief economist, Europe, for Nomura International and a senior official at the Bank of England. He earned a Ph.D. in economics and an Master of Philosophy Degree in control engineering and operational research from the University of Cambridge, and a Bachelor of Science Degree in mathematics and economics from the University of York. He is a visiting professor at Queen Mary University of London.

Comments

Gilbert C. | June 24, 2016 2:40 am

Thanks for the question, Gilbert. We anticipate market volatility in the near term; however, we would caution against making investment decisions based on news such as this. Here’s an article with analysis from our chief European economist Peter Westaway.

Gwendolyn W. | June 23, 2016 11:41 pm

Hi, Gwendolyn. We anticipate some market volatility in the near term, but we would caution against making investment decisions based on current news or events. While it can be difficult not to react during times like this, often the best investment decision is to stay the course. Here’s an article with insight and analysis from Vanguard Chief European Economist Peter Westaway on the Brexit vote.

Dale E. | May 16, 2016 3:37 pm

It seems to me that the balanced analysis would put the probability of a negative effect of exit at 35%, a positive economic effect at 25%, and a neutral economic effect at 40%. The British decision will likely come down to cultural considerations being most important to the outcome.

Richard C. | May 15, 2016 12:21 pm

The key factor in this decision is ” should the United Kingdom continue to allow unrestricted access to foreigners to come and work in the country. I am sure the United Kingdom has become quite racially diversified over the last 40 years, and it’s former colonial population has been integrating into their society for many years.

However, like any country in Europe today, the threat of radical Islamism is a growing, and unrestricted access is making it more difficult to manage the problem. Britain has a long history of conflict with Islam going back to the crusades and you can bet that radical Islamic groups use that history to justify current terrorism today.

Another problem relating to unrestricted access is that terrorist cells are able to come to the country and convert non militant Muslim citizens to radicalism.
Did Britain allow Germans to come and work during World War II? The analogy is not that far off the mark.

Anne T. | May 14, 2016 9:55 pm

I’m not sure that some of the issues raised here were done thoroughly. London is doing quite well, but much like the US, parts where prospects were slim have gotten slimmer with the heavy immigration of the last ten years, North of a line about 50 miles north of London it is a very different Britain. That’s in no small measure what the Scots’ independence vote was about.

The City took good care of itself, too bad about the democracy thing. I have a hard time believing Soc Gen, BNP, Frankfurt, et al, are not going to use a Brexit to their maximum advantage and create as many restrictions as possible. Factor in some hypocritical zealotry from eurobankers about getting rid of hidden offshore assets (which London banks specialize in), and the only growth industry will be rude Chinese diplomats.

Raymond H. | May 14, 2016 5:06 pm

Joe S. is correct. The Brexit issue is not just an economic one. The onslaught of immigration into Europe and the open borders which the EU creates is what’s pushing the drive for Brexit. Europe is rapidly becoming another place and if demographic trends hold up, it’s culture will be fundamentally changed within a generation or two. Most Brits are dismayed by this prospect and want no part of it, especially since so much of the bureaucracy the EU emanates from Belgium and France with are their even more immediate cultural conflicts. But economically once you are in the EU it’s murder to leave. This was the fear when Britain first joined and it is now coming to pass.

Manuel H. | May 14, 2016 3:17 pm

Sir , thank you for your Honest opinion , I personally think successful exit from turmoil in Europe will ensure Safety for the people of United Kingdom , quality of life Trumps profits . May Democracy live & Conquer Radicalism

John S. | May 14, 2016 2:51 pm

As Vanguard knows strong emotions can lead to poor investments. Scots leaving Britain, Britain leaving ” Europe ” smacks more of the emotional than good economics and business. Despite language and cultural variations Europe is a functional whole and yes, Britain is a part of that whole or else history is all wrong. Continuing interdependence and mobility will give us all better investment choices.

Donald S. | May 14, 2016 2:46 pm

The larger companies listed in the S&P 500 Index Fund already, in large part, are well diversified internationally in both assets and income source. Does that in itself not satisfy the need for diversity of the average investor? I worked for one such company for many years and know that over 50% or revenue was from ex-US subsidiaries.

The companies that make up the S&P 500 Index are in large part multinationals that already are widely diversified internationally in their investment and income sources. The typical investor in the S&P 500 Index fund, therefore, should have no great need to invest in international funds as well. So it seems to me, as a former longterm employee of one of those multinationals. I know that more than half the corporate income came from ex-US subsidiaries.

William G. | May 14, 2016 1:37 pm

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.